Euro at three-month high, bond yields key

Thu May 14, 2015 6:02am EDT
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By Jamie McGeever

LONDON (Reuters) - The euro hit a three-month high against the dollar on Thursday, drawing further support from a sustained surge in euro zone government bond yields that again kept global stock markets on the defensive.

Investors digested figures from the previous day that showed relatively strong euro zone economic growth in the first quarter, contrasting with disappointingly weak U.S. retail sales in April.

The euro rose above $1.14, bringing its gains against the U.S. currency in the last month to nearly 9 percent as the difference between benchmark U.S. and euro zone 10-year yields shrinks from the euro-lifetime high touched in March.

European stock markets were a sea of red on Thursday, with investors worried about volatility and the tightening of financial conditions resulting from the plunge in bond prices and spike in yields.

Asian stocks ex-Japan were broadly flat while Japan's Nikkei 225 index fell 1 percent, weighed down by the yen's strength against the sagging dollar.

"The euro is continuing to rebound, supported by the ongoing adjustment higher in euro zone yields. (This)... is in part supported by strengthening growth in the euro zone and higher inflation expectations," said Lee Hardman, currency strategist at BTMU in London.

The euro was up more than 0.5 percent on the day at $1.1415, as the U.S.-German 10-year yield spread narrowed to a three-month low of 152 basis points. In mid-March, the yield advantage in favor of the dollar was over 190 basis points.

This pulled the dollar index, a measure of its against a basket of six currencies, down to a four-month low of 93.175.   Continued...

An employee of Tokyo Stock Exchange (TSE) touches his face as he works at the bourse at TSE in Tokyo December 15, 2014.  REUTERS/Yuya Shino